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Haucap, Justus --- "Bounded Rationality and Competition Policy" [2011] ELECD 348; in Drexl, Josef; Kerber, Wolfgang; Podszun, Rupprecht (eds), "Competition Policy and the Economic Approach" (Edward Elgar Publishing, 2011)

Book Title: Competition Policy and the Economic Approach

Editor(s): Drexl, Josef; Kerber, Wolfgang; Podszun, Rupprecht

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848448841

Section: Chapter 11

Section Title: Bounded Rationality and Competition Policy

Author(s): Haucap, Justus

Number of pages: 13

Extract:

11. Bounded rationality and
competition policy
Justus Haucap

1. INTRODUCTION

More than 50 years ago Herbert Simon introduced the concept of bounded
rationality into the economics literature. As the term already suggests, the
concept does not imply completely irrational behavior, but rather a limited
form of rationality. According to Simon (1957: 24) himself economic
actors should be assumed to be `intendedly rational, but only limitedly so'.
Simon's original idea was to develop models which would describe how
decisions are reached rather than what decision is finally made (also see
Gigerenzer and Selten 2002: 4). These models would be based on heuristics
or proximal mechanisms rather than optimization processes. According
to Selten (1990: 653), Gilboa and Schmeidler (1995) and others, human
behavior is not guided by a few abstract principles, but rather case-based in
the sense that simple decision rules are employed which are chosen on the
basis of a few simple criteria. As Gigerenzer and Selten (2002: 4) correctly
point out, it is possible that in real world situations `simple and robust
heuristics can match or even outperform a specific optimization strategy'.
A similar point was previously also made and illustrated by Heiner (1983).
Today, however, the term bounded rationality is not limited to this par-
ticular understanding. In fact, as Gigerenzer and Selten (2002: 4) remark,
`bounded rationality has become a fashionable label for almost every
model of human behavior'. While this `complaint' may be exaggerated,
it is certainly true that at least two understandings of boundedly ...